Bankruptcy can be a daunting and complex process, but understanding the different types can provide clarity and help you make informed decisions. Each type of bankruptcy serves a distinct purpose and can apply to specific situations.
If you’re struggling with debt, it’s important to understand the types of bankruptcies that may be available to you and how they might help you resolve your problems with debt.
Chapter 7 Bankruptcy: Liquidation
Chapter 7 bankruptcy, often referred to as "liquidation" bankruptcy, is one of the most common forms. It's designed for individuals and businesses with significant debt and limited means to repay it. Under Chapter 7, a trustee is appointed to oversee the process, which includes selling non-exempt assets to pay off creditors.
The process starts with filing a petition with the bankruptcy court. This petition includes detailed information about your financial situation, including assets, liabilities, income, and expenses. Once the court approves the petition, an automatic stay goes into effect, halting all collection activities from creditors. The trustee then evaluates the case and sells any non-exempt property. Certain assets, such as your primary residence, personal items, and tools of the trade, may be exempt from liquidation under federal or state law.
The proceeds from the sale of non-exempt assets go towards paying off your debts, which are typically discharged within a few months. Discharged debts are no longer your responsibility, giving you a fresh financial start. However, not all debts can be discharged in Chapter 7, including most student loans, child support, and certain tax obligations.
Chapter 13 Bankruptcy: Repayment Plan
Chapter 13 bankruptcy is known as a "reorganization" bankruptcy. It's designed for individuals with regular income who can repay a portion of their debts through a structured repayment plan. This type of bankruptcy allows you to keep your property and catch up on missed mortgage or car payments while eliminating unsecured debts.
The process begins with filing a petition and proposing a repayment plan to the court. This plan, which lasts three to five years, must demonstrate your ability to make regular payments toward your debts. A court-appointed trustee oversees the plan, collecting payments from you and distributing them to creditors.
One of the key benefits of Chapter 13 is the ability to save your home from foreclosure. By including missed mortgage payments in the repayment plan, you can catch up over time and keep your house. Additionally, Chapter 13 can help you manage other secured debts, like car loans, and reduce the amount owed on unsecured debts, such as credit cards and medical bills.
At the end of the repayment period, any remaining unsecured debts are typically discharged. Chapter 13 offers a more gradual path to debt relief compared to Chapter 7, making it a viable option for those with a steady income and a desire to retain their assets.
Chapter 11 Bankruptcy: Business Reorganization
Chapter 11 bankruptcy is primarily used by businesses to restructure their debts and operations while continuing to operate. This type of bankruptcy can also apply to individuals with substantial debts and assets, although it's less common.
The Chapter 11 process starts with filing a petition and creating a reorganization plan. This plan outlines how the business will modify its operations and manage its debts to return to profitability. Creditors and the court must approve the plan. Once approved, the business operates under the terms of the plan while repaying its debts over time.
Chapter 11 provides significant flexibility, allowing businesses to renegotiate contracts, downsize operations, and restructure debt. It can be a lengthy and expensive process, often involving complex negotiations with creditors. However, for businesses with potential for long-term success, Chapter 11 offers a chance to recover and thrive.
For individuals, Chapter 11 can provide a way to manage large-scale debts and protect significant assets. It involves similar steps to the business process, including proposing a reorganization plan and obtaining court approval. While less common for individuals, it can be an effective tool for managing substantial financial challenges.
Contact Us for Help with Your Debt!
If you owe significant debt as a business owner or individual, bankruptcy can help you pave a path to a less frustrating future. When interest, fees, and penalties have made your ability to stay on top of your debt untenable, it’s time to contact an experienced bankruptcy lawyer for help.
We at Buchalter & Pelphrey can provide the legal support you need during this time. We’ve assisted many previous clients facing challenges similar to yours, so rest assured that we have what it takes to help you.
For more information, contact us online and request an initial consultation.